Is it Literally Impossible to Pay Off a Title Loan?

I recently published a law review article entitled Grand Theft Auto Loans with Ozy Adams.  It discusses title lending based upon data collected by the State of New Mexico.  This article cover a tremendous amount of ground, but as these things tend to go, I have now heard of two critical topics we should ahve discussed but didn't. 

We do discuss how the loans are almost always interest-only and can only be paid off all at once, not in installments.  We also talka bout how these loans are also typically entirely asset-based, meaning that if a customer has no income at all, she can still take out a large title loan. We also discuss repo rates per loan (between 5% and 22%),  repo rates per customer (between 20 and 70%), total vehicles lost once reclamation is taken into account per customer (between 13% and 60%), interest rates for title loans (most commonly 300% per annum or 25% per month), percentage of auto value lenders will lend on (25-40%), and amount returned to customer from sale proceeds after repossession and sale (next to nothing once the fees are racked up). 

Here are two important things we missed.  First, it seems that the process of repossessing and then having a customer redeem the vehicle is extremely profitable for the lender and very expensive for the client.  Having asked around bit this past week, I am hearing regular stories about this from legal aid offices around the state.  I don’t think I quite realized what a profit center repossession followed by redemption really was.  This also means that in states that report only vehicles ultimately lost to repossession, this added expense/loss is never accounted for and is thus not in the reported repossession numbers. This deserves further study.

Second, above I say the loans can only be paid off in one lump sum.  But I kid you not, folks, that is so wrong!  Reality check:  You can’t pay them off at all!  I do not mean that the customer cannot come up with the money.  What I mean is that the lenders find ways to keep you in the loans even if you show up with the total amount of funds owed.  They will not take checks from banks.  Even if you seemingly pay it off in full, they come up with charges they missed and keep asking for more.  They refuse to release titles.  They try to confuse customers, do not listen to customers, by hook or by crook, they simply will not take the principal to pay off the loan. One friend of mine who runs a CDC has documented these practices over and over again. He has found that unless they feel the law might get involved, the loans never die.

This is something that needs immediate attention.  In fact, if this has been your own or a client’s experience, I hope you write about it here.  In the meantime, spread the word to avoid this form of credit. It is far more dangerous that a payday loan, even if it is half- price interest. 

 

 

 

Comments

[trail]

What a title loan amounts to is a quick way to sell your car when it is more important to have the cash today than to have the car. The amount you are going to get for the car is a fraction of its value, but that is what people in this position are willing to accept to get fast cash. If people had time, they'd sell the car through other channels and get more - the problem is, they don't have time. I'm not trying to make any moral judgements here, just to describe the transaction.

[Jay Speer]

As usual, you know your subject. This is absolutely the game being played by the car title lenders and it is because they are loan sharks not lenders. Loan sharks don't want you to pay the principal, just the interest and they want you to pay forever if possible. We know of a legal aid client in Virginia that redeemed her repossessed car three times. A borrower is scared to death to lose the car because loss of car equals loss of job for many people. When the lender takes your car, you will pay almost anything to get it back if you are afraid of losing your job.

When Virginia passed a car title loan statute in 2010 we tried to address this very problem by making them send you a notice before they repossessed saying how much you owe and if you pay within 10 days they can't repossess. (Va Code 6.2-2217) Not only does this give the borrower the chance to pay, it clarifies how much is owed so they can't play this game. We heard over and over again about how a borrower would go to a church or charity, get the $ and then-- whoops! we forgot to tell you about this additional fee.

Some car title lenders in Virginia are not sending the notice before they repossess claiming the law isn't clear that they have to do that. We will see about that.

Virginia law also says they have to send you a notice 15 days before sale after they repossess saying how much you owe and give you the right to redeem. That is in addition to UCC Art 9 requirements. I haven't heard that car title lenders are disputing their duty to do this.

Finally, Virginia law doesn't allow them to charge any interest after they repossess and they can't sue for a deficiency so there is little doubt about how much is owed.

Our law also requires them to give the title back "promptly" after the loan is paid.

Virginia law still allows over 200% interest so it is hardly ideal but it does try and address some of the problems mentioned in this article.

[Jay Speer]

"What a title loan amounts to is a quick way to sell your car when it is more important to have the cash today than to have the car."

It is marketed and sold as a loan not a sale. If the borrower thinks she is selling, why does she pay back 3 or 4 times what she borrowed in interest and principal?

Ask the lenders--they will always say they don't want the cars.

[Nathalie Martin]

Thanks very much for your insights Jay and trail. Hopefully a few consumers will take note and drive the other way.

[Mike]

Your information is completely incorrect for California. I don't know the laws in New Mexico but I am very suspicious of the authors claims to have interviewed the finance companies. Most businesses jealously guard information.
Title loans are simple interest which means you can pay as much as you want at any time and the interest for the next period MUST be calculated on the new, lower balance. You absolutely cannot load unpaid balances onto the balance and charge interest. The repo rates they are claiming are absurd.
These loans are very high interest and are typically used in high stress situations - pending eviction etc. My advice to anyone facing a refusal to have their loan paid off is to start a small claims case (which is free for low income people) as this is blatantly illegal.

[Ray Wallace, Jr.]

I received a car title loan sometime before 2004. I made payments on it, but it did get past due at times. I have not been notified by the company since 2006. I really thought that I had paid off the loan and just forgot to go and get back my title. However, after calling DMV to get a copy of my title, I was informed that the car title loan company had a lein on my car. What can I do about this being that I haven't been notified about any balance in 6 years?

[Benjamin Martineau]

I think most of what you write is cherry picked to incite emotion and not based on fact.

I read your Grand Theft Auto Loans article. In it you cite Idaho as an example of an lax regulation state. I am familiar with Idaho consumer lending laws and very familiar with the title lending industry in Idaho. Idaho is the extent of my knowledge so I'm not suggesting it applies to the rest of the nation.

1: "The loans are almost always interest-only"
- Idaho only allows for 2 months of interest only. After 2 months at least 10% of original principle must be repaid making the longest possible title loan 12 months. Further, if a customer misses a payments the lender must charge interest on the reduced principle as if it had been reduced by 10%

"can only be paid off all at once, not in installments."
- I am not aware of a single title lender in Idaho has this policy people can pay back part or all of the loan at any time. If they only have half, they can pay half and renew the rest. I have never even heard of this ever!

"these loans are also typically entirely asset-based, meaning that if a customer has no income at all, she can still take out a large title loan."
- Absolutely NOT. Ability to repay is required, just ask anyone at the regulating body Idaho Department of Finance"

"We also discuss repo rates per loan (between 5% and 22%)"
- I agree here, but it seems to be closer to 5% for most

"interest rates for title loans (most commonly 300% per annum or 25% per month)"
- Spot on

"First, it seems that the process of repossessing and then having a customer redeem the vehicle is extremely profitable for the lender"
- Idaho law does not allow the lender to charge fees after repossession in excess of what was actually incurred. That means if the lender did it all in-house they make nothing for the repo, nothing for storage, and nothing for sale. In addition interest charges stop as soon as repossession occurs. If the lender outsources the fees are paid to the outsourced companies so the title lender makes NOTHING from a repossession other than the interest owed before repossession. Nobody likes a repo.

"You can’t pay them off at all!"
- Pure Bias. Obviously you they get paid back. If your 5-22% repo rate is correct that would mean 78-95% get paid back. Don't slant your article so heavily.

There are plenty of problems with Title Lending and other alternative financing. One should not oversimplify based on a couple horror stories and a few bad apples.

My comments are based in Idaho, but I bet a few other state experts(like the California guy on 6/8/12) would disagree with most of your "facts."

I do agree that people should avoid title as well as other alternative lending and instead try to stick with something tried and proven, like Dave Ramsey's teachings.

Feel free to contact me if you want more information on Idaho and the title lending industry here. [email protected]

[Nathalie Martin]

Super interesting comments Benjamin. Sounds like consumers are getting a far better deal in Idaho than in many other states, where it operates exactly as I have reported it, including people not getting their titles back. I have dealt with many consumers (not just a few horror stories) who have gotten into this and been unable to come out, mostly because of wholly assets-based lending.

For the benefit of our readers, I am reproducing a section of Idaho law, that could be useful for other states considering regulating this. I would obviously prefer not to allow any lending at 300% or more, but these provisions to do seem to be helpful, assuming lenders comply.

I am curious about how the law got passed. Do you know, Benjamin?

28-46-506. RENEWAL OF TITLE LOAN AGREEMENTS. (1) Title loan agreements
shall not exceed thirty (30) days in length. However, such agreements may
provide for renewals, which may occur automatically, unless one (1) of the
following has occurred:
(a) The debtor has paid all principal and finance charges due in
accordance with the title loan agreement;
(b) The debtor has surrendered possession, title and all other interest
in and to the titled personal property to the title lender; or
(c) The title lender has notified the debtor in writing that the title
loan agreement is not to be renewed.
(2) A debtor has the right to cancel the debtor's obligation to make
payments under a title loan agreement until the close of the next business day
after the day when the debtor signs a title loan agreement if the debtor
returns the original check or cash to the location where the loan was
originated. For the purpose of this section, "business day" means any day that
the title loan office is open for business.
(3) Notwithstanding any provision of this part 5 to the contrary,
beginning with the third renewal or continuation and at each successive
renewal or continuation thereafter, the debtor shall be required to make a
payment of at least ten percent (10%) of the principal amount of the original
title loan in addition to any finance charges that are due. Finance charges
due at each successive renewal or continuation shall be calculated on the
outstanding principal balance. Principal payments in excess of the ten percent
(10%) required principal reduction shall be credited to the outstanding
principal on the day received. If at the maturity of any renewal requiring a
principal reduction, the debtor has not made previous principal reductions
adequate to satisfy the current required principal reduction, and the debtor
cannot repay at least ten percent (10%) of the original principal balance and
any outstanding finance charges, the title lender may, but shall not be
obligated to, defer any required principal payment until a future date. No
further finance charges may accrue on any such principal amount thus deferred.
(4) Within fourteen (14) days after a title loan is automatically
renewed, the title lender shall provide the debtor written notice of the
renewal either by personal delivery to the debtor or by deposit in the regular
mail to the debtor's residential address listed in the title loan agreement.
For the purpose of this section, a renewal is any extension of a title loan
for an additional period without any change in the terms of the title loan
other than extension of the maturity date and a reduction in principal.